5.3.1 Definition of capacity and capacity utilization

• In operations management, capacity refers to the maximum amount of goods or services that a business can produce within a specific period
• A manufacturing plant with a capacity of 5,000 widgets per month can produce up to 5,000 widgets in a month if it operates at 100% capacity.
• Capacity utilization measures the percentage to which a company is using its full potential capacity
• What is the formula for calculating capacity utilization?

  $\frac{\text{Actual Output}}{\text{Maximum Capacity}} \times 100\%$
• A capacity utilization of 80% indicates efficient use of resources.
• One benefit of high capacity utilization is reduced fixed costs per unit
• What are some problems of exceeding capacity?

  Higher errors, increased downtime
• Capacity is the maximum potential production of a business.
• Compared to capacity, capacity utilization indicates the efficiency
• Match the capacity utilization range with its implications:

  0-70% ↔️ Underutilization, reduced profitability

  70-90% ↔️ Optimal utilization, balanced costs

  90-100% ↔️ Overutilization, higher downtime
• A capacity utilization of 80% indicates optimal use of resources.
• To improve capacity utilization, businesses can increase demand
• Order the strategies to improve capacity utilization:

  1️⃣ Increase Demand

  2️⃣ Optimize Resources

  3️⃣ Flexible Production

  4️⃣ Manage Capacity